Assume a Can Opener*

At the request of the Chairman of the House Budget Committee, Congressman Paul Ryan, the Congressional Budget Office (CBO) has calculated the long-term budgetary impact of paths for federal revenues and spending specified by the Chairman and his staff. The calculations presented here represent CBO’s assessment of how the specified paths would alter the trajectories of federal debt, revenues, spending, and economic output relative to the trajectories under two scenarios that CBO has analyzed previously. Those calculations do not represent a cost estimate for legislation or an analysis of the effects of any given policies. In particular, CBO has not considered whether the specified paths are consistent with the policy proposals or budget figures released today by Chairman Ryan as part of his proposed budget resolution.

In other words (as stressed by Ezra Klein), Representative Ryan specified revenues and expenditures, and told CBO to calculate how the debt trajectory would change as a consequence. In other words, CBO did not “score” the plan, exactly because so much was unspecified. In this respect, it shares a lot with Romney's plan, but even more so. This is also very much like the previous iteration of the Ryan plan. I would call this “constructive ambiguity”, except it seems completely unconstructive to me.

Klein summarizes the can opener:

Ryan tells CBO to assume his tax plan will raise revenues to 19 percent of GDP and then hold them there. He tells them to assume his Medicare plan will hold cost growth in Medicare to GDP+0.5 percentage points. He tells them to assume that spending on Medicaid and the Children’s Health Insurance Program won’t grow any faster than inflation. He tells them to assume that all federal spending aside from Medicare, Medicaid and Social Security will fall from 12.5 percent of GDP in 2011 to 3.75 percent of GDP in 2050.

So everything from food stamps to defense to the NOAA and USGS (think tornado alerts and earthquake alerts) amounts to no more than 4% of GDP) by 2050, in the Ryan budget.

Well, one can still estimate what would happen if tax rates were reduced, but none of the unspecified tax expenditures eliminated. This is what the Joint Brookings-Urban Tax Policy Center has done:

This scoring is visualized by the Center for a Responsible Federal Budget, hardly a leftist organization.

Figure 1 from Center for a Responsible Federal Budget.

Let me say upfront that this scoring doesn’t include tax revenue responses of either a Keynesian or supply side sort due to behavioral changes. I am confident that if one were to include the supply side responses incorporated in the Heritage Foundation’s analysis of the earlier Ryan Plan, then the circle could be squared! All one needs is some price elasticities many times larger than those in the extant literature, and et voila – a supply side miracle and a debt-to-GDP reduction as government spending is decreased. As I noted in this post, an elasticity about ten times that cited in the literature would do the trick.

More on the Heritage Foundation’s previous “analysis” of the Ryan plan here and here.

Speaking of Representative Ryan’s economic analyses, I am still awaiting massive crowding out due to government borrowing pushing up interest rates. [1]

Two weeks ago, when we commented on the biggest farce in financial thinking at the time (promptly replaced by the even more lunatic platinum coin "idea"), namely that one of the main "spending cut" proposals of the Obama administration, amounting to $290 billion, was the assertion that the US will save hundreds of billions because, get this, interest rates are now lower than they were before.

By Simon Johnson
The conventional wisdom in American presidential politics is that once a candidate has secured a party’s nomination, he tends to move away from articulating the views of the party faithful toward the political center. This makes sense as a way to win votes in the general election, and there has been a presumption that Mitt Romney will head in that direction.

When Rep. Paul Ryan sent his alternative budget proposal to the Congressional Budget Office to be scored, there was a bit of a caveat: The CBO doesn't estimate revenues. That's the job of the Joint Committee on Taxation (yes, Washington is weird). So the CBO and Ryan's staff agreed to assume that under Ryan's plan, tax revenues remained at about 19 percent of GDP.

Yesterday, the Congressional Budget Office returned a fairly devastating estimate of Sens. Ted Kennedy (D-Mass.) and Chris Dodd's (D-Conn.) Affordable Health Choices Act. According to the agency, the bill would cost a hefty trillion dollars over 10 years and extend insurance to a mere 16 million people. That's a lot of money to spend if you're only going to achieve a third of your goal. Frankly, I was pretty surprised by the results.

The Concord Coalition has a helpful analysis of the budget debate that we’re still waiting for. That is to say that leaving aside the question of the FY 2011 appropriation, how does Paul Ryan write a budget that extends the Bush tax cuts, rules out all other tax increases, and nonetheless gets a budget deficit lower than what the White House has preposed. The short answer is that they can’t: